Are Gold Funds Worth Investing In?
Back in 1848, gold nuggets were discovered in the Sacramento Valley, triggering the first-ever documented scramble for this valuable yellow metal, the California Gold Rush. By the time it was done, people had extracted over 750,000 pounds of gold worth over $2 billion from the site.
Was this the first time people had discovered how lucrative and valuable gold was? Not in the least. Gold was first uncovered about 5,000 years ago by the Egyptian civilization.
While their use for it was barely aesthetic, gold would become the first truly standardized global currency in 560 BC. Merchants used gold coins to trade with other people. These coins had seals stamped on them to establish authenticity.
Fast forward to today, paper currency is the best choice for monetary transactions. A lot of people believe that gold is a relic that does not hold the same value as it did ages ago. They add that gold’s sole benefit is that it can be made into jewelry and used in electronics, but does not enjoy the same intrinsic value it held back then.
Are they right? Let’s find out.
Picking up from where we left off earlier, gold was beginning to be favored as money all over the world. This influence of gold continued to spread throughout Europe, the UK, Africa, Asia, and the Americas. One can find evidence of this can in museums all over the world – golden relics from Greek and Roman civilizations are displayed.
The first step towards standardizing currency came with the British developing a metals-based currency instead of physical gold in 1066. The British currency at that time was based on the amount of gold and silver they held in their banks.
The United States built on this tradition of issuing currency proportionate to the amount of gold they held in their reserve. The US government established the Bimetallic Standard in 1792. The Bimetallic Standard stated that every monetary unit needed to be backed up with proportionate gold or silver. 24.75 grains of gold made one US dollar. This means that currency was the equivalent of the amount of gold or silver held by the bank at a particular time.
However, this method of monetizing did not last for long. The federal reserve was created in 1913 and started the issuing of promissory notes, which could then be redeemed for gold. The gold standard was abandoned in 1971 when currencies were stopped being backed by gold. This by no means diminished the value of gold, as countries even today hold substantial gold reserves to fall back on in the case of economic fallout.
While it is true that the gold reserve is no more in use today, countries still have vast reserves of gold for dealing with adverse economic conditions. Critical financial organizations like central banks and the International Monetary Fund still holds 1/5th of the gold above ground. This is because no one really knows about the long term evolution of the global economy.
Gold has historically proven to hold value much better than any other asset over thousands of years. This is why most financial organizations always have a considerable back up of gold, which they can turn to if the economy becomes unstable.
If there’s one thing that gold has been able to accomplish consistently, it is the ability to hold value much better than other assets in the market. This becomes apparent when you compare paper currency today, which has been losing value due to inflation. A house that was bought for $30,000 over 30 years ago costs $200,000 now. A real-life example can explain this more clearly.
In 1950, the average price of an ounce of gold was $40.25. Today, the price of gold on the market is $1,483. If you had held on to 40 dollars, you wouldn’t even be able to buy a gram of gold today. This is how well gold is able to preserve wealth and hold its value. As you can see, there is a huge difference between gold and paper currency when it comes to long term investments.
The modern economy has been subject to rising inflation owing to various scenarios prevailing in the world. Increasing inflation means that the US dollar is on a constant decline, which is problematic for investors.
Gold is negatively correlated with inflation, meaning while most other types of assets depreciate, gold’s value increases. The reason for this is that when money loses value in the market, investors turn to gold. Gold is a hard asset and has been able to hold value for long periods, prevailing economic conditions notwithstanding.
Gold also has an interesting relationship with the US dollar – it benefits when the dollar declines. One reason this happens is entities looking to invest in gold, like central banks, exchange their US dollar for the transaction. At the same time, global investors are also trying to diversify their investment portfolio by offloading dollars. The drop in dollar values means people holding other currencies can buy gold cheaper. As a result, the US dollar drops further in value, while the demand for gold rises.
There are considerable political and economic upheavals in the world today. They’ve had a telling effect on the value of the currency. Economic fallouts are more common these days due to tensions around the world. Gold has been able to help investors during economic turmoil and uncertainty.
History has shown that amidst falling empires, and turbulent revolutions, people who have held gold were able to protect their wealth better. This is one reason why gold prices immediately spike when there is uncertainty on the horizon. The increase in price is because people are buying gold in the market as a safe-haven investment.
A lot of people say that gold is a risky investment, and they’re right. Gold is volatile and risky, but that’s not a bad thing. The reason why a lot of people feel that gold is risky is that it can lag behind when the market is looking up. However, when the market is looking down, gold tends to move the other way. It can be safe and pay off really well if you do just that little bit of research.
When you look at the history between stocks and gold prices, you’ll find that gold does its own thing. It is negatively correlated with most assets out there. Meaning, if everything else is down, you can depend on gold to prop you back up, which is invaluable if you’re in a fix. It’s always good to own assets that move differently from each other. Gold is a great asset to diversify your portfolio since you have a great chance at capitalizing on the market during the lull.
An example of this happening is during the great recession of 2007. When the S&P 500 Index fell 36%, gold prices surprisingly increased by 25%. While this kind of rise isn’t the norm, it does give us some idea as to how gold moves against stocks.
The answer to the question is not really simple. Any investment has its own set of quirks, and gold is no different. Gold is classified as a risky asset, but this does not mean it isn’t a worthwhile investment. The ideal investment strategy for gold would be to partner it up with other assets that move differently.
There are also several advantages that gold has, which most other assets do not. In a high inflation scenario, when stocks and paper currency are down, most investors turn to gold. Over the years, gold has been able to hold value much better than all other asset classes. These attributes make it a dependable asset to be added to a portfolio that already has several uncorrelated asset classes.
So, why doesn’t everyone invest in gold then? Part of the risk of gold as an investment is the question of how to own it. There are several options you have, like bullion, coins, ETFs, miners, and more. A little bit of research can give you a good chance at better investment strategies with gold.